IWPA – Value-added correction

October 16, 2019

By: The Working Forest Staff

An article by the IWPA, written over three years ago, was inadvertently posted on this site causing much confusion as the information contained in his article is out of date. Russ Cameron, president of the IWPA has provided an updated letter addressing current conditions and the IWPA’s position below:

 

The Independent Wood Processors Association (IWPA www.iwpabc.com) represents BC’s community based value-added enterprises. We are in complete agreement with the Premier that we need to replace lost sawmill jobs with jobs that add more value to the lumber that comes out of our sawmills.

BC’s family-owned non-tenured wood processors have the ability to do that, but only if we can get access to a share of the BC Public’s resource and get access to the US market. Unfortunately, neither of these requirements have been met for the last 15 years, and the result is that 54 of the 107 member companies that we had prior to the Forest Renewal Act (FRA) of 2003 have gone out of business.

FRA 2003 allowed the big public companies to consolidate control of the resource; eliminated the Small Business Forest Enterprise Program (SBFEP) that allowed non-tenured companies to competitively bid for a share of the timber resource; replaced the SBFEP with BC Timber sales; introduced the non-responsive Market Pricing System (MPS); slashed the already meager Category 2 value-added program by 2/3rds; and it led to our subsequent disqualification from bidding for BCTS timber unless we paid a 15% export tax on the cost of adding value in BC. I am sure the Act was well-intentioned, but the FRA 2003 has not served the Province well.

We believe there is a fix, but the big tenure holders aren’t going to like it. Making the Premier’s vision of the future into a reality is going to require guts and resolve on the part of the BC Government. 

First, they need to break up the control of our resource with a ‘use it or lose it’ policy with respect to Tenure, and they need to restore and auction a substantial share of the resource for non-tenured wood processors to bid for. The big tenured companies claim that they must have Tenure to operate. But the 50 or 60 sawmills that they have collectively acquired in the United States don’t have any Tenure. Why do they need to keep their security of Tenure for the curtailed BC mills but not for the operating US mills pray tell?

Did you know that the five biggest tenured companies now control about 30 million m3 of our resource for their exclusive non-competitive use? Did you know that BC’s dozens of non-tenured value-added companies now have a province-wide total resource share of only 1.1 million m3 for which we compete?

Next, the non-responsive Market Pricing System that we are currently defending at NAFTA and WTO has to go. It’s not that it isn’t defensible. It’s that it simply doesn’t work for us here in BC. 

These changes and others have to be made prior to entering into a new Softwood Lumber Agreement with the USA. The last Agreement froze BC Forest Policy “as is” and prohibited any significant changes for nine years.

And then there is the problem of the Americans not liking that BC’s stumpage rates are set using a formula instead of through competition. They repeatedly find that using a formula to price tenured timber amounts to a subsidy, and they slap duties on all our wood products. Even on the value-added products of non-tenured companies that remanufacture lumber purchased on the open market in direct competition with the Americans.

The value-added sector that the Premier wishes to grow is presently trying to compete in the US market while paying a 20% Duty on the wood, and a 20% Duty on the cost of employing British Columbians to add value to it. As was the case when Canada imposed a 15% export tax on our products from 2006 until 2015, these Duties are designed to make us uncompetitive in the US market, and they are effective in doing so.

And now, in addition to high levels of log exports, some of BC’s big tenured companies are sending the lumber they cut from BC’s forests to the USA and employing Americans to do the value-added work that we used to do in BC.

Interfor has been doing it for years in Sumas, Washington. Western Forest Products has recently purchased a large remanufacturing facility in Arlington, Washington. Western has begun sending down 110,000,000 bf a year and employing Americans to add value to it. The first of what is inevitably going be the permanent closure of several more BC value-added plants, occurred in September when Western diverted their supply to their new American value-added facility.

The BC Government needs to stop and reverse this practice. The IWPA has no problem with BC companies operating in the USA, but if they wish to do so, they should feed those plants with US grown fibre, not BC’s.

These changes will get us back to where we were, but there remains another obstacle that could make the Premier’s vision an impossibility.

Unless we abandon the Tenure system, there are three likely outcomes to the current softwood lumber dispute with the USA.

One, the Duties remain on permanently. Result … value-added in BC will continue to decline. The purpose of the US imposed 20% Duty is to make us uncompetitive in the USA by raising the price of Canadian lumber products in the US market. It works.

Two, we eventually win the case at NAFTA after a couple more years of paying Duty. Result … a brief period of free trade until a new US Coalition Petition reimposes Duties, and we can start all over again.

Three, we reach an agreement with the Americans. Result … it’s not that simple. An agreement can be Border Tax based or Quota based, and they each have very different outcomes for BC’s non-tenured value-added wood processors.

BC’s big five tenured companies want a Border Tax based Agreement. The only difference between US Duties and a Border Tax is that the proceeds of the former go to the US Treasury and the latter to the Canadian Federal Government. Either way, Duties or Border Taxes are fatal for the Premier’s value-added vision and many of BC’s surviving value-added firms.

If you were wondering why the big five would want to pay a Border Tax instead of having a Duty free Quota, it’s because they have purchased over 50 US sawmills in the last 15 years.

One of them currently leads the pack with 70% of its softwood lumber production in the USA and 30% in BC. Half of the BC production goes to China Duty-free. So, they pay the 20% Duty on the remaining 15% but get to raise the price by 20% on the 70% produced in the US. The result is that they are more profitable under Duties or Border Taxes than they are under free trade. A good strategy for their shareholders, but not so good for BC. 

Fortunately, the US Coalition is expected to insist on a Quota-based deal or no deal at all. A Border Tax based Agreement requires that the Coalition freeze BC Forest policy “as is” and then monitor it to ensure it remains “as is.” But a quota-based agreement does not require freezing or monitoring because changes to BC Forest Policy cannot increase the volume of lumber shipped to the USA. But even if the Coalition prevails, BC’s value-added firms would not necessarily be out of the woods. It depends on how the quota is allocated within BC.

The 1996 Quota based Agreement distributed quota pro-rata based upon a company’s history of US shipments. That method of allocation capped BC’s value-added production at a level that was somewhat lower than it was the day before the Quotas took effect. In 2019, the situation is worse. The US now requires cash deposits from the Importer of Record (IOR), and most of BC’s family-owned and operated value-added companies can’t afford to make these deposits. Hence, BC’s value-added firms would get very little, if any, quota. 

But there is a way to allocate BC’s Quota that would be beneficial to all. We call it the “Growth Pool.”

It goes like this. Canada gets a Quota, and the Provinces duke it out for their share. Once BC has its share, the BC Gov allocates it only to tenured producers but requires them to leave a portion of it in Victoria … the Growth Pool. Non-tenured companies purchase lumber from the tenured sawmills, add the value, and use quota from the Growth Pool to ship their value-added products across the line.

As a result, we can grow value-added in BC, and BC’s tenured sawmills can cut more lumber per unit of quota.

Here is why. If a sawmill ships 1000 board feet of lumber across the line, they use 1000 board feet of BC’s Quota. But if they sell 1000 board feet of lumber to a BC value-added company (we pay the same price by the way), we trim off and chip the waste and rejects to sell to pulp mills, pellet plants, and bio-energy companies and we sell some of our resulting value-added products in Canada and overseas. By the time we are done with that 1000 board feet, there will only be about 750 board feet left to ship to the USA. We will, therefore, only use about 750 bf of BC’s precious quota from the Growth Pool instead of the tenured company using 1000 bf of its quota. 

Why waste Quota shipping trim loss, fall down products, and our jobs to the USA?

So, let’s get a quota-based agreement, allocate it as above, and the result will be more logging jobs, more trucking jobs, more sawmill jobs, more remanufacturing jobs, and more Government Revenue. And these benefits will increase in direct proportion to the amount of wood to which we add value to in BC.

And the Premier’s vision can become a reality.

Russ Cameron

Independent Wood Processors Association (IWPA)

 www.iwpabc.com 

 

 

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